Economic growth has recently slowed across much of the world economy following stronger-than-expected performance during the first quarter of 2008. The net result is likely to be that on a year-over year basis, global real GDP growth for 2008 will be only slightly below the 3.8 percent forecast last April. For 2009, however, growth now looks likely to decelerate to slightly below 3.5 percent rather than accelerate to 4 percent.
Meanwhile, the broad upsurge in commodity prices of earlier this year has been largely if not completely reversed. In particular, the price for light sweet crude has fallen back from a peak of almost $150 per barrel to about $100 per barrel but is still above the $80 per barrel price of late 2007. Recent sharp declines in commodity prices will help to bring down headline inflation rates, at least for a while, although core inflation rates will likely remain uncomfortably high in a number of countries. In some emerging-market countries, where policies have remained lax, inflation will continue to be a critical problem.
Thus, looking to the rest of 2008 and to 2009, the world economy will experience mild stagflation. World real GDP growth (on the basis of the International Monetary Fund’s World Economic Outlook [WEO]) will be significantly below the 4¾ percent average annual rate achieved from 2004 through 2007 but meaningfully above the 2½ percent rate that marks the borderline of global recession. 1 World consumer price inflation (measured on a 12-month basis) will fall below the recent high of over 6 percent but remain above 4 percent through 2009. Economic policies, therefore, will generally face the dual challenges of ensuring that inflation returns to acceptable rates within reasonable time horizons and of guarding against unnecessarily deep and prolonged slowdowns in output growth.
For most countries, however, these challenges should be significantly less severe than those of the two recent episodes of global stagflation: 1973 to 1976 and 1979 to 1984. In the present episode, industrial countries do not have to confront inflation rates that have been allowed to escalate well into double digits, and accordingly, they do not need to pursue aggressive monetary tightenings likely to pitch their economies into deep and prolonged recessions.